Crispy Plays in the Fast Food Space

 | Aug 18, 2012 | 2:30 PM EDT
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Note: An earlier version of this story included an analysis of J. Alexander's (JAX) that did not include recent buyout news. The analysis has since been removed.

In Friday's session, one big price mover early on was AFC Enterprises (AFCE), Atlanta-based operator of Popeyes Louisiana Kitchen and Popeyes Chicken & Biscuits restaurants.

The stock sported some erratic trade Thursday after the company reported its second quarter. AFC beat on the top and bottom lines, and it raised fiscal 2012 earnings guidance. However, it was downgraded to Hold from Buy at Felti & Co., even as the analyst shop raised its price target on the stock to $26 from $21.50.

An intraday chart shows a 7.5% gap-up at the open Thursday, then a gradual selloff throughout the session.

CEO Cheryl Batchelder got some airtime with Jim Cramer on Mad Money after the close Thursday, making her case for growth in the Louisiana Kitchen unit, as well as for international growth prospects. Following this, not only was the stock trading higher Friday morning, but volume was above average. I would consider this stock to be buyable, but there are a couple of possible areas where AFC could hit resistance. First there's the $24-to-$25 range, where the stock has stalled twice and, second, there's above $26, where it was briefly trading during Thursday's gap higher.

AFC's move comes at a time when some of the longtime leaders of the chain-restaurant world have been consolidating. An easy-to-spot example is Chipotle Mexican Grill (CMG), which is down 32% from its April peak of $442.40. It's not unusual to see smaller stocks correct at these rates, but you don't see it as often with large, liquid names such as Chipotle.

Does this mean the stock can never rally back? Of course not. In fact, its free fall could ultimately bode well for the stock: It could have the effect of flushing out investors who lack confidence in the company, and set the stage for bargain-hunters to grab shares at a cheaper valuation. The fundamental case here remains strong, with Wall Street eyeing earnings of 32% this year and 21% in 2013.

But one unheralded small-cap restaurant name -- Nathan's Famous (NATH) -- is strong in both the fundamental and technical columns, and has been in rally mode lately. Shares of the hot-dog purveyor, which also runs Arthur Treacher's fish and chips restaurants, is well extended from any semblance of a buy point. The stock is up 8% so far in August, marking its seventh month in a row of gains. Year to date, the stock is up 56%.

Nathan's rallied to an all-time high of $33.39 Friday, but proceeded to retreat from that level. It recently pulled back to get support at its 15-day line -- but, at this juncture, a 50-day retreat may be a more constructive development, and could potentially offer a new entry point. In fact, a new base, with lows below the 50-day, may be technically warranted after the extended run-up. 

Please note that due to factors including low market capitalization and/or insufficient public float, we consider ­­­­NATH to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Another small restaurant stock that's been in rally mode isn in



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